What Happens To Directors Of An Insolvent Company During Liquidation?

business people sat in a meeting room

When a company becomes insolvent, it’s crucial that they are prioritising the interests of creditors, employees and shareholders in the business. This means that they need to be proactive in seeking professional advice to rescue or liquidate the company. In most cases of insolvency, the business will need to be liquidated. This means an insolvency practitioner will be appointed to organise the liquidation and distribution of assets, ensuring all the affairs of the company are wound up correctly. So what happens to directors of an insolvent company during this process?

Directors Take A Step Back

When an insolvency practitioner is appointed as liquidator, they will take over control of the company, albeit, directors will still be expected to cooperate. The liquidator takes over control of communications with creditors, however will require the assistance of the director to gather accounts and information. When discussing what happens to directors of an insolvent company in liquidation, it’s important to emphasise that the process is certainly not trying to work against directors. Rather it is to achieve the best outcome possible in the circumstances for all stakeholders in the business. Whilst the company will be under the supervision of an insolvency practitioner, the director’s involvement will still be required.

Investigation Into Directorial Conduct

Part of the insolvency practitioner’s role is to investigate why the company became insolvent in the first place.  This requires them to investigate the conduct of directors. First and foremost, they will be looking for evidence that directors prioritised the interests of creditors. This will include looking for instances in which creditor interests were overlooked or ignored. In addition to this, the liquidator will be checking for any instances of wrongful trading or other misconduct, such as misfeasance. Evidence of this could result in the director being disqualified, or in the most severe cases, legal action being taken against them. Directorial conduct up to and during the period of insolvency can have a large impact on what happens to directors of an insolvent company during liquidation. This is why it’s so important to ensure fiduciary duties are being followed, and to ask for clarification from an insolvency practitioner if you’re unsure what is required of you. 

Potential For Personal Liability

When discussing what happens to directors of an insolvent company, one of the main concerns that may be had is whether or not directors will be personally liable for company debts. When a company becomes insolvent, directors are protected by the ‘veil of corporation’. However, there may be instances that are not covered by limited liability. This includes if a director has provided a personal guarantee attached to a loan, or has an overdrawn directors loan account. In this case, if the company cannot cover the cost of the debts, it may fall onto the director’s personal funds to cover it.

Redundancy Payments

There may be anxiety surrounding what happens to directors of an insolvent company, however it’s also important to emphasise that directors are eligible for statutory entitlements. Directors may be eligible for redundancy pay, as well as other statutory entitlements, such as holiday pay and unpaid wages. In order to be eligible to claim directors redundancy, directors must:

  • Be registered on the PAYE system 
  • Have worked a minimum of 16 hours per week
  • Worked under a contract of employment for at least two years 

As long as there has been no evidence of misconduct, it’s perfectly possible for a director to become the director of another company again in the future. 

If your company is facing insolvency, and you are concerned about the future, please don’t hesitate to get in touch with our experienced team of insolvency practitioners. We will talk you through the next steps, ensuring you take the best path forward for your company and as a director. 

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